Stocks Surrender Gains, Fitch Downgrades Spain's BBVA, Santander

Steve Schaefer
,
Forbes Staff
If you can put the word markets after it, I cover it.

(Image credit: AFP/Getty Images via @daylife)

Markets seemed to embrace a weekend rescue plan for Spanish banks Monday, but gains evaporated on concern over the lack of detail in the plan and renewed worry that if conditions were bad enough to warrant a rescue for Spain, Italy may not be far behind.

The initial reaction was a positive one, with stocks across Europe rallying and pulling U.S. equities along for the ride, but the gains were halved leading into the close across the pond and domestic indexes slid into the red.

Heading toward noon the Dow Jones industrial average was down 35 points at 12,519, the S&P 500 was off 3 points at 1,323 and the Nasdaq was 7 points lower at 2.852. A bounce in the euro was also erased, with the 17-nation currency back below $1.25 at $1.2497.

BBVA and Banco Santander both fell to session lows after Fitch Ratings cut both to BBB+ from A. The firm said the downgrades were primarily based on its three-notch cut to the Spanish sovereign rating June 7, which came on concern that the country is expected to be in a recession through 2012 and 2013.

Both banks have international diversification, Fitch noted, which leave them in better shape than purely-domestic peers, but that “does not entirely mitigate the rating constraints arising from their domicile.”

The downgrades reminded markets that the €100 billion bank recapitalization that the euro zone agreed to provide through either the yet-to-be-launched European Stability Mechanism or the existing European Financial Stability Facility Saturday, is a pledge for aid rather than a final solution to the crisis across the continent. The deal, which does not require further austerity pledges from the sovereign in return for the cash injection, is also likely to raise the ire of Portugal, Ireland and Greece, which had to agree to drastic spending cuts in order to secure their own rescues.

Greece’s next round of elections June 16 remains a crucial tipping point, and investors do not appear convinced that an agreement to help Spain’s banks will keep the crisis from sweeping up Italy. The country’s bond yields, which have fallen below those of Spain over the past several months, flared up somewhat Monday. Italian 10-year paper yields 5.84%, still below the 6.47% of Spain but at a wider spread to German 10-year bunds, which were at 1.30%, than last week.